{"id":12408,"date":"2023-04-17T03:47:13","date_gmt":"2023-04-17T03:47:13","guid":{"rendered":"http:\/\/lynettelockhart.com\/client\/analysis-new-boj-heads-message\/"},"modified":"2023-04-17T03:49:53","modified_gmt":"2023-04-17T03:49:53","slug":"analysis-new-boj-chiefs-message","status":"publish","type":"post","link":"http:\/\/lynettelockhart.com\/client\/analysis-new-boj-chiefs-message\/","title":{"rendered":"Analysis-New BOJ chief’s message to world: We’re staying the course – for now"},"content":{"rendered":"

By Leika Kihara<\/p>\n

WASHINGTON (Reuters) – Japan’s new central bank Governor Kazuo Ueda gave a clear message to policymakers gathered for global finance meetings here over the last week: The country will remain a dovish outlier by keeping interest rates ultra-low – at least for now.<\/p>\n

Since taking the helm a week ago, Ueda has dropped some hints the massive stimulus of his dovish predecessor Haruhiko Kuroda will eventually be phased out.<\/p>\n

But discussions over when and how to shift away from the ultra-loose policy will take time, giving Ueda every reason to reassure the world any change won’t happen quickly.<\/p>\n

“In many countries, inflation is very high or not slowing enough. The important thing is that the situation is quite different in Japan, which I explained at the meeting,” Ueda told reporters on Wednesday after attending a finance leaders’ meeting of the Group of Seven advanced economies, held alongside the spring meetings of the International Monetary Fund and World Bank.<\/p>\n

Japan’s inflation, now around 3%, will slow back below the BOJ’s 2% target later this year on falling import costs, Ueda told Thursday’s bigger gathering of ministers from the Group of 20, in explaining his plan to keep monetary policy ultra-loose for now.<\/p>\n

The dovish remarks likely underscore the BOJ’s desire to avoid a repeat of January, when markets anticipating a swifter pivot by the BOJ to tweak its yield curve control (YCC) policy pushed up long-term interest rates.<\/p>\n

Under YCC, the BOJ guides short-term rates at -0.1% and the 10-year Japan government bond yield around zero with an implicit cap of 0.5%. With inflation exceeding the BOJ’s target and the cost of prolonged easing increasing, markets are rife with speculation that Ueda will move towards tweaking YCC this year.<\/p>\n

The 10-year yield is currently a shade below the cap at 0.47%, but on repeated occasions earlier this year traders drove it above 0.5%, pressing the BOJ to defend the mark.<\/p>\n

The BOJ’s dovish message, and rising market expectations of another interest rate hike by the U.S. Federal Reserve in May, pushed the dollar up 0.16% against the yen on Monday.<\/p>\n

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(Graphic: Defending the yield cap in Japan – https:\/\/www.reuters.com\/graphics\/IMF-WORLDBANK\/JAPAN\/xmvjkjyxnpr\/chart.png)<\/p>\n

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SCOPE TO TWEAK THIS YEAR<\/p>\n

Ueda will chair his first BOJ policy meeting on April 27-28, when the board will issue fresh quarterly growth and inflation forecasts that will come under scrutiny for signs on how soon the central bank projects inflation to sustainably hit its 2% target.<\/p>\n

Uncertainty over the world economy, highlighted by the International Monetary Fund’s stark warning of global recession risks on Tuesday, adds reasons for Ueda to move slowly and cautiously.<\/p>\n

And yet, analysts say Ueda’s remarks leave scope for changes to YCC, which has drawn criticism for distorting the shape of the JGB yield curve and crushing financial institutions’ margin.<\/p>\n

While stressing that the BOJ’s focus now should be to avoid a premature exit, Ueda said on Wednesday he won’t deny the risk of being behind the curve in addressing too-high inflation.<\/p>\n

That followed his remarks on April 10 that the BOJ must make “pre-emptive” decisions on the timing of normalizing policy, as waiting too long could make the adjustment disruptive.<\/p>\n

“We’ll discuss all options at each of our policy meetings,” Ueda said on Monday, when asked about the chance of adjusting the BOJ’s guidance committing to keep interest rates ultra-low.<\/p>\n

“Ueda and his deputies are taking care not to give any hint on the timing of a policy tweak,” said former BOJ official Nobuyasu Atago, currently an analyst at Ichiyoshi Securities.<\/p>\n

“But they also haven’t completely ruled out the chance of a near-term tweak to YCC,” he said.<\/p>\n

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(Graphic: Japan inflation – https:\/\/www.reuters.com\/graphics\/IMF-WORLDBANK\/JAPAN\/gdvzqnaeepw\/chart.png)<\/p>\n

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SUPPLY SHOCKS, TRADE OFFS<\/p>\n

Intensifying global debate over the cost of delaying monetary tightening could challenge the BOJ’s view the recent cost-driven inflation will prove temporary.<\/p>\n

IMF First Deputy Managing Director Gita Gopinath said the days when central banks could focus on demand, and assume that supply would be elastic and a given, may be over.<\/p>\n

“We’re in an economy where we’re going to be hit more by supply shocks, and monetary policy will face more serious trade-offs,” she said on Friday.<\/p>\n

The IMF had a piece of advice to Ueda: relax the BOJ’s control and allow long-term rates to rise more flexibly – a move that will help ease the strain on the banking sector.<\/p>\n

Ranil Salgado, the IMF’s Japan mission chief, sees scope for the BOJ to modify the long-term yield target this year, given heightening prospects of durable wage growth.<\/p>\n

As long as the short-term rates remain zero or slightly negative, the BOJ can keep monetary policy accommodative even if it tweaks the yield target, he said.<\/p>\n

“We are advising (the BOJ) to pretty much already be thinking about it,” Salgado said on the idea of tweaking YCC.<\/p>\n

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(Reporting by Leika Kihara; Editing by Dan Burns and Andrea Ricci)<\/p>\n

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